[Federal Register Volume 76, Number 187 (Tuesday, September 27, 2011)]
[Proposed Rules]
[Pages 59592-59596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-24785]


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DEPARTMENT OF THE TREASURY

17 CFR Parts 400, 401, 402, 403, 405, and 420

[Docket No. BPD GSRS 11-01]
RIN 1535-AA02


Government Securities Act Regulations; Replacement of References 
to Credit Ratings and Technical Amendments

AGENCY: Office of the Assistant Secretary for Financial Markets, 
Treasury.

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Treasury'' or ``We'') is 
issuing this proposed rule to solicit public comment on a proposed 
amendment to the regulations issued under the Government Securities Act 
of 1986, as amended (``GSA''), to replace references to credit ratings 
in our rules with alternative requirements. Section 939A of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 requires 
Federal agencies to remove from their applicable regulations any 
reference to or requirement of reliance on credit ratings and to 
substitute a standard of creditworthiness as the agency determines 
appropriate for such regulations. In this release Treasury is 
requesting comment on a substitute standard of creditworthiness for use 
in the liquid capital rule required by GSA regulations. Separately, we 
are proposing in this release several non-substantive, technical 
amendments to Treasury's GSA regulations to update certain information 
or to delete certain requirements that are no longer applicable.

DATES: Submit comments on or before November 28, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    Use the Federal eRulemaking Portal (http://www.regulations.gov) and 
follow the instructions for submitting comments through the Web site. 
You may download this proposed amendment from http://www.regulations.gov or the Bureau of the Public Debt's Web site at 
http://www.treasurydirect.gov.

Paper Comments

    Send paper comments to Bureau of the Public Debt, Government 
Securities Regulations Staff, 799 9th Street, NW., Washington, DC 
20239-0001.

[[Page 59593]]

    Please submit your comments using only one method, along with your 
full name and mailing address. We will post all comments on the Bureau 
of the Public Debt's Web site at http://www.treasurydirect.gov. The 
proposed amendment and comments will also be available for public 
inspection and copying at the Treasury Department Library, Main 
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. 
To visit the library, call (202) 622-0990 for an appointment. In 
general, comments received, including attachments and other supporting 
materials, are part of the public record and are available to the 
public. Do not submit any information in your comment or supporting 
materials that you consider confidential or inappropriate for public 
disclosure.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena, Chuck Andreatta, or 
Kevin Hawkins, Department of the Treasury, Bureau of the Public Debt, 
Government Securities Regulations Staff, (202) 504-3632.

SUPPLEMENTARY INFORMATION: We are proposing to amend Treasury's liquid 
capital rule for registered government securities brokers and dealers 
under the GSA regulations at 17 CFR part 402 (``liquid capital rule'') 
to remove references to credit ratings and substitute a standard of 
creditworthiness. We are proposing this amendment in order to comply 
with the requirements of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act'').\1\ At the same time, we 
are seeking neither to narrow nor broaden the scope of financial 
instruments that would qualify for beneficial treatment under the 
existing rule. Section 939A(a) of the Dodd-Frank Act requires that 
Federal agencies, to the extent applicable, ``review (1) any regulation 
issued by such agency that requires the use of an assessment of the 
creditworthiness of a security or money market instrument; and (2) any 
references to or requirements in such regulations regarding credit 
ratings.'' Section 939A(b) requires the agency to modify any 
regulations identified to ``remove any reference to or requirement of 
reliance on credit ratings and to substitute in such regulations such 
standard of creditworthiness'' as the agency determines to be 
appropriate for such regulations.\2\
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    \1\ Public Law 111-203, 124 Stat. 1376.
    \2\ See Section 939A of the Dodd-Frank Act.
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I. Current Liquid Capital Rule

    Treasury's liquid capital rule (17 CFR 402.2) prescribes minimum 
regulatory capital requirements for registered government securities 
brokers and dealers. In general, the liquid capital rule is a minimum 
ratio requirement of liquid capital to risk, as measured using various 
``haircuts.'' \3\ Specifically, a government securities broker or 
dealer may not permit its liquid capital to be below an amount equal to 
120 percent of ``total haircuts,'' which is the sum of ``credit risk 
haircuts'' and ``market risk haircuts'' calculated by each government 
securities broker or dealer.\4\
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    \3\ A ``haircut'' in the context of Treasury's liquid capital 
rule refers to a deduction in the market value of securities or 
other instruments held by a government securities broker or dealer 
as part of net worth for calculating its liquid capital.
    \4\ See Sec. Sec.  402.2(a) and 402.2(g).
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    In describing the method for registered government securities 
brokers and dealers to calculate their minimum capital requirements, 
the liquid capital rule categorizes certain dollar-denominated 
securities, debt instruments, and derivative instruments as ``Treasury 
market risk instruments.'' \5\ These instruments receive a more 
favorable capital treatment than instruments that are more susceptible 
to changes in value due to market fluctuations, which receive a higher 
``other securities haircut.'' \6\ The definition of Treasury market 
risk instruments includes commercial paper, which, in order to receive 
the more favorable haircut treatment of Treasury market risk 
instruments must be, ``of no more than one year to maturity [and] rated 
in one of the three highest categories by at least two nationally 
recognized statistical rating organizations.'' \7\
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    \5\ See Sec.  402.2(e).
    \6\ See Sec.  402.2a(b).
    \7\ See Sec.  402.2(e)(1)(v), Sec.  402.2a--Schedule A 
Instructions for Line 3, and Sec.  404.2a--Schedule B.
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    The liquid capital rule includes three references to a rating by a 
nationally recognized statistical rating organization (``NRSRO''), 
i.e., a credit rating, each in regard to commercial paper. NRSROs are 
credit rating agencies that are subject to Securities and Exchange 
Commission registration and oversight.

II. Proposed Amendments to the Liquid Capital Rule

    In conformance with section 939A of the Dodd-Frank Act, Treasury is 
proposing to remove from the liquid capital rule the three references 
to credit ratings \8\ that currently are used to determine whether 
specific issues of commercial paper are eligible to be treated as 
Treasury market risk instruments for haircut purposes. In place of 
these references, and as a substitute alternative standard of 
creditworthiness, Treasury is proposing to amend the term ``Treasury 
market risk instrument'' in the liquid capital rule to include 
commercial paper that ``has only a minimal amount of credit risk as 
reasonably determined by the government securities broker or dealer 
pursuant to written policies and procedures the government securities 
broker or dealer establishes, maintains, and enforces to assess 
creditworthiness.'' In making this assessment, the government 
securities broker or dealer would be required to follow written 
policies and procedures that it would establish, maintain, and enforce. 
In making an assessment of credit and liquidity risk, the government 
securities broker or dealer could consider the following factors, to 
the extent appropriate, with respect to commercial paper.\9\ The range 
and type of specific factors considered, and the frequency of their 
review, would vary depending on the particular commercial paper under 
review.
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    \8\ Id.
    \9\ This list of factors is not exhaustive or mutually 
exclusive. It is patterned after the list of factors proposed by the 
Securities and Exchange Commission in its current proposed 
amendments to Exchange Act Rule 15c3-1, and the Rule's appendices, 
to remove references to credit ratings in the Commission's Net 
Capital Rule. 76 FR 26550 (May 6, 2011).
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     Credit spreads (i.e., whether it is possible to 
demonstrate that a position in commercial paper is subject to a minimal 
amount of credit risk based on the spread between the commercial 
paper's yield and the yield of Treasury or other securities, or based 
on credit default swap spreads that reference the security);
     Liquidity (i.e., whether the commercial paper can be sold 
quickly at a minimal transaction cost);
     Securities-related research (i.e., whether providers of 
securities-related research believe the issuer of the commercial paper 
will be able to meet its financial commitments, generally, or 
specifically, with respect to the commercial paper held by the 
government securities broker or government securities dealer);
     Internal or external credit risk assessments (i.e., 
whether credit assessments developed internally by the government 
securities broker or government securities dealer or externally by a 
credit rating agency, irrespective of its status as an NRSRO, express a 
view as to the credit risk associated with a particular security);

[[Page 59594]]

     Default statistics (i.e., whether providers of credit 
information relating to securities express a view that the commercial 
paper has a probability of default consistent with other commercial 
paper with a minimal amount of credit risk);
     Inclusion on an index (i.e., whether a security, or issuer 
of the security, is included as a component of a recognized index of 
instruments that are subject to a minimal amount of credit risk);
     Price and/or yield (i.e., whether the price and yield of a 
security are consistent with other securities that the government 
securities broker or government securities dealer has reasonably 
determined are subject to a minimal amount of credit risk and whether 
the price resulted from active trading); and
     Factors specific to the commercial paper market (e.g., 
general liquidity conditions).
    If the government securities broker or dealer determines through 
its assessment that the commercial paper has more than a minimal amount 
of credit risk, the commercial paper would not be classified as a 
Treasury market risk instrument, and would therefore receive the less 
favorable ``other securities haircut'' in the liquid capital 
computation. Similarly, if the government securities broker or dealer 
does not have written policies and procedures to assess 
creditworthiness, all commercial paper would receive the ``other 
securities haircut'' treatment.
    Under Treasury's GSA regulations that govern recordkeeping 
requirements,\10\ which generally incorporate the SEC's Rule 17a-4 
recordkeeping requirements for brokers and dealers,\11\ each government 
securities broker or dealer would be required to preserve for a period 
of not less than three years, the first two years in an easily 
accessible place, the written policies and procedures that it 
establishes, maintains, and enforces for assessing credit risk for 
commercial paper. The SEC has proposed amending Rule 17a-4 to include 
in the list of records required to be preserved the written policies 
and procedures a broker-dealer establishes, maintains, and enforces to 
assess creditworthiness.\12\ No amendment is necessary to Treasury's 
recordkeeping requirements in Sec.  404.3 because they incorporate by 
reference the SEC's Rule 17a-4.
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    \10\ See Sec.  404.3(a).
    \11\ See 17 CFR 240.17a-4.
    \12\ 76 FR 26552 (May 6, 2011). OMB Control No. 3235-0279.
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    A government securities broker's or dealer's process for 
establishing creditworthiness and its written policies and procedures 
documenting that process would be subject to review in regulatory 
examinations by the SEC and self-regulatory organizations. There are 
three registered government securities brokers and dealers, none of 
which currently or routinely hold commercial paper.
    We are requesting comment on all aspects of this proposed 
amendment. In addition, we request comment on the following specific 
questions:
     Is the proposed approach appropriate or are there 
alternative approaches that we should consider?
     What is the expected impact on government securities 
brokers and dealers and other market participants?
     Are there other factors a government securities broker or 
dealer should use when making an assessment of the credit risk of 
commercial paper?
     Should the list of factors be included in the text of the 
liquid capital rule? Should the list be published as guidance?
     How often should a government securities broker or dealer 
be required to update its assessment of the credit risk of commercial 
paper to ensure that it remains current?
     Is the proposed recordkeeping requirement for government 
securities brokers' and dealers' written policies and procedures, as 
incorporated by reference to the SEC's Rule 17a-4 (and proposed 
amendments), adequate to ensure government securities brokers' and 
dealers' compliance with their written policies and procedures on an 
indefinite basis?
     What would be the appropriate level of regulatory 
oversight of a government securities broker or dealer's credit 
determination processes? How should a government securities broker or 
dealer be able to demonstrate to regulators the adequacy of the 
processes that it adopts and that it is following them?
     How consistent should credit determination criteria be 
across brokers and dealers?

III. Proposed Amendments to Reporting Requirements and Other Amendments

    As part of our review of our Federal regulations required by 
Executive Order 13563, we are proposing to streamline the GSA 
regulations by deleting certain requirements. Specifically, we are 
proposing to delete the sections in our reporting requirements that 
refer to year 2000 (``Y2K'') readiness reports because they are no 
longer needed.\13\ We are also proposing to delete references to 
various other requirements in the GSA regulations that are contingent 
on actions to be taken by specific dates in the past and therefore are 
no longer applicable.
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    \13\ See Sec.  405.2 paragraphs (a)(11) through (a)(14).
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IV. Special Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. 
This rule has been designated a ``significant regulatory action,'' 
although not economically significant, under section 3(f) of Executive 
Order 12866. Accordingly, the rule has been reviewed by the Office of 
Management and Budget.
    This proposed amendment would potentially affect three registered 
government securities brokers or dealers, none of which currently or 
routinely hold commercial paper. Accordingly, at this time, Treasury is 
not submitting a Paperwork Reduction Act submission related to the 
proposed rule's information collection requirements. Additionally, 
because the proposed amendment would not have a significant economic 
impact on a substantial number of small entities, a regulatory 
flexibility analysis is not required under the Regulatory Flexibility 
Act (5 U.S.C. 601, et seq.).

List of Subjects in 17 CFR Part 400

    Administrative practice and procedure, Banks, banking, Brokers, 
Government securities, Reporting and recordkeeping requirements.

    For the reasons set out in the preamble, we propose that 17 CFR 
400.2 be revised as follows:

PART 400--RULES OF GENERAL APPLICATION

    1. The authority citation for part 400 continues to read as 
follows:

    Authority:  15 U.S.C. 78o-5.

    2. Section 400.2 is amended by revising the last sentence of 
paragraph (c)(7)(i) to read as follows:

[[Page 59595]]

Sec.  400.2  Office responsible for regulations; filing of requests for 
exemption, for interpretations and of other materials.

* * * * *
    (c) * * *
    (7) * * *
    (i) * * * These documents will be made available at the following 
location: Treasury Department Library, Main Treasury Building, 1500 
Pennsylvania Avenue, NW., Washington, DC 20220.

List of Subjects in 17 CFR Part 401

    Banks, banking, Brokers, Government securities.

    For the reasons set out in the preamble, we propose that 17 CFR 
401.7 and 401.8 be deleted.

PART 401--EXEMPTIONS

    1. The authority citation for part 401 continues to read as 
follows:

    Authority:  Sec. 101, Pub. L. 99-571, 100 Stat. 3209 (15 U.S.C. 
78o-5(a)(4)).

    2. Sections 401.7 and 401.8 are deleted and section 401.9 is 
redesignated as section 401.7.

List of Subjects in 17 CFR Part 402

    Brokers, Government securities.

    For the reasons set out in the preamble, we propose that 17 CFR 
402.2e be deleted and that 402.1, 402.2 and 402.2a be amended as 
follows:

PART 402--FINANCIAL RESPONSIBILITY

    1. The authority citation for part 402 continues to read as 
follows:

    Authority: 15 U.S.C. 78o-5(b)(1)(A), (b)(4), Pub. L. 111-203, 
124 Stat. 1376.
    2. Section 402.1 is amended by revising paragraph (f) to read as 
follows:


Sec.  402.1  Application of part to registered brokers and dealers and 
financial institutions; special rules for futures commission merchants 
and government securities interdealer brokers; effective date.

* * * * *
    (f) This part shall be effective July 25, 1987.
    3. Section 402.2 is amended by revising paragraphs (b)(1), (b)(2), 
(c)(1), (c)(2), and (e)(1)(v) to read as follows:


Sec.  402.2  Capital requirements for registered government securities 
brokers and dealers.

* * * * *
    (b)(1) Minimum liquid capital for brokers or dealers that carry 
customer accounts. Notwithstanding the provisions of paragraph (a) of 
this section, a government securities broker or dealer that carries 
customer or broker or dealer accounts and receives or holds funds or 
securities for those persons within the meaning of Sec.  240.15c3-
1(a)(2)(i) of this title, shall have and maintain liquid capital in an 
amount not less than $250,000, after deducting total haircuts as 
defined in paragraph (g) of this section.
    (2) Minimum liquid capital for brokers or dealers that carry 
customer accounts, but do not generally hold customer funds or 
securities. Notwithstanding the provisions of paragraphs (a) and (b)(1) 
of this section, a government securities broker or dealer that carries 
customer or broker or dealer accounts and is exempt from the provisions 
of Sec.  240.15c3-3 of this title, as made applicable to government 
securities brokers and dealers by Sec.  403.4 of this chapter, pursuant 
to paragraph (k)(2)(i), shall have and maintain liquid capital in an 
amount not less than $100,000, after deducting total haircuts as 
defined in paragraph (g) of this section.
    (c)(1) Minimum liquid capital for introducing brokers that receive 
securities. Notwithstanding the provisions of paragraphs (a) and (b) of 
this section, a government securities broker or dealer that introduces 
on a fully disclosed basis transactions and accounts of customers to 
another registered or noticed government securities broker or dealer 
but does not receive, directly or indirectly, funds from or for, or owe 
funds to, customers, and does not carry the accounts of, or for, 
customers shall have and maintain liquid capital in an amount not less 
than $50,000, after deducting total haircuts as defined in paragraph 
(g) of this section.
* * * * *
    (2) Minimum liquid capital for introducing brokers that do not 
receive or handle customer funds or securities. Notwithstanding the 
provisions of paragraphs (a), (b) and (c)(1) of this section, a 
government securities broker or dealer that does not receive, directly 
or indirectly, or hold funds or securities for, or owe funds or 
securities to, customers, and does not carry accounts of, or for, 
customers and that effects ten or fewer transactions in securities in 
any one calendar year for its own investment account shall have and 
maintain liquid capital in an amount not less than $25,000, after 
deducting total haircuts as defined in paragraph (g) of this section.
* * * * *
    (e) * * *
    (1) * * *
    (v) Commercial paper of no more than one year to maturity and which 
has only a minimal amount of credit risk as reasonably determined by 
the government securities broker or dealer pursuant to written policies 
and procedures the government securities broker or dealer establishes, 
maintains, and enforces to assess creditworthiness;
* * * * *
    4. Section 402.2a is amended by revising the Instructions to 
Schedule A, Line 3, paragraph c., and Instructions to Schedule B, 
Columns 3 and 4, paragraph (5) to read as follows:


Sec.  402.2a  Appendix A--Calculation of market risk haircut for 
purposes of Sec.  402.2(g)(2).

* * * * *

Instructions to Schedules A Through E

* * * * *

Schedule A--Liquid Capital Requirement Summary Computation

* * * * *
    c. Enter the credit volatility haircut which equals a factor of 
0.15 percent applied to the larger of the gross long or gross short 
position in money market instruments qualifying as Treasury market 
risk instruments which mature in 45 days or more, in futures and 
forwards on these instruments that are settled on a cash or delivery 
basis, and in futures and forwards on time deposits described in 
Sec.  402.2(e)(1)(vii), that mature in 45 days or more, settled on a 
cash or delivery basis. Money market instruments qualifying as 
Treasury market risk instruments are (1) Marketable certificates of 
deposit with no more than one year to maturity, (2) bankers 
acceptances, and (3) commercial paper of no more than one year to 
maturity and which has only a minimal amount of credit risk as 
reasonably determined by the government securities broker or dealer 
pursuant to written policies and procedures the government 
securities broker or government securities dealer establishes, 
maintains, and enforces to assess creditworthiness.
* * * * *

Schedule B--Calculation of Net Immediate Position in Securities and 
Financings

* * * * *
    (5) Commercial paper of no more than one year to maturity and 
which has only a minimal amount of credit risk as reasonably 
determined by the government securities broker or dealer pursuant to 
written policies and procedures the government securities broker or 
dealer establishes, maintains, and enforces to assess 
creditworthiness; and
* * * * *


Sec.  402.5a  [Deleted]

    5. Section 402.5a is deleted.

List of Subjects in 17 CFR Part 403

    Banks, banking, Brokers, Government securities.

    For the reasons set out in the preamble, 17 CFR part 403 is amended 
as follows:

[[Page 59596]]

PART 403--PROTECTION OF CUSTOMER SECURITIES AND BALANCES

    1. The authority citation for part 403 continues to read as 
follows:

    Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; sec. 4(b), 
Pub. L. 101-432, 104 Stat. 963; sec. 102, sec. 106, Pub. L. 103-202, 
107 Stat. 2344 (15 U.S.C. 78o-5(a)(5), (b)(1)(A), (b)(4)).


Sec.  403.7  [Amended]

    2. Section 403.7 is amended by deleting paragraphs (d) and (e).

List of Subjects in 17 CFR Part 405

    Brokers, Government securities, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, we propose that 17 CFR 
405.2 and 405.5 be amended as follows:

PART 405--REPORTS AND AUDIT

    1. The authority citation for part 405 continues to read as 
follows:

    Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).


Sec.  405.2  [Amended]

    2. Section 405.2 is amended by deleting paragraphs (a)(11) through 
(a)(14) and redesignating paragraphs (a)(15) and (a)(16) as paragraphs 
(a)(11) and (a)(12), respectively.


Sec.  405.5  [Amended]

    3. Section 405.5 is amended by deleting paragraph (a)(7).

List of Subjects in 17 CFR Part 420

    Foreign investments in U.S., Government securities, Investments, 
Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, we propose that 17 CFR part 
420 be amended as follows:

PART 420--LARGE POSITION REPORTING

    1. The authority citation for part 420 continues to read as 
follows:

    Authority: 15 U.S.C. 78o-5(f).

    2. Section 420.4 is amended by deleting paragraphs (a)(2) and 
(a)(3), and redesignating paragraph (a)(1) as paragraph (a) to read as 
follows:


Sec.  420.4  Recordkeeping.

    (a) An aggregating entity that controls a portion of its reporting 
entity's reportable position in a recently-issued Treasury security, 
when such reportable position of the reporting entity equals or exceeds 
the minimum large position threshold, shall be responsible for making 
and maintaining the records prescribed in this section.
* * * * *

Mary J. Miller,
Assistant Secretary for Financial Markets.
[FR Doc. 2011-24785 Filed 9-26-11; 8:45 am]
BILLING CODE 4810-39-P